90% of your Retirement Income is from Investment Returns

For those who believe that investment contributions during the working years constitute the bulk of retirement income, think again. New research suggests that up to 90% of a retiree’s income is generated by investment returns, 60% of which occurs after retirement, turning conventional retirement wisdom on its head.

The report, The Russell 10/30/60 Retirement Rule is a new twist on 20 year old research by former Russell director of investment strategy Don Ezra. Ezra modeled DB plan growth and found that for any one plan member, the largest part of the investment return accrues during the payout stage.

The report explains how the defined contribution (DC) plan benefits that a participant receives in retirement can be broken down as follows: 10% of each retirement income dollar consists of contributions made to the DC plan while working, 30% is made up of investment returns generated prior to retirement, and 60% is made up of investment returns generated after retirement.

The report suggests the 10/30/60 pattern holds true across a range of variables, such as the retirement age, the age when saving begins and age of death—and found that only lowering the expected post-retirement return would significantly change the 10/30/60 rule.

The report has ramifications for plan sponsors, according to Matt Smith, managing director of retirement services at Russell Investments. He says the findings should illustrate the lifecycle of an employee’s pension plan and draw attention to the fact that the retirement date is not the end of the road. “What we tell plan sponsors is, [once retirement has been reached] they think they may be done, but they’re only 40% of the way there,” says Smith. He adds that plan sponsors should be educating members on their retirement goals from the earliest possible time in order to attain a sustainable retirement income as opposed to waiting until later in life. “We’d like to see this message land in your 20s and 30s rather than your 50s and 60s.”

Smith also says the report highlights the idea that members need to plan very carefully for retirement and should save enough to live past the average life expectancy. “Unless we have some very explicit information about how long we’re going to live, we have to plan to live longer than average, just in case we do,” he says. Smith suggests that’s why 60% of retirement income is coming from earnings, because members have to stretch the account out for long periods of time, making investment policy paramount.

Smith hopes the general message of the report isn’t lost in the discussion of the 10/30/60 rule. "It would be wrong to conclude that contribution level is not important. Indeed, without contributions there can be no investment return," says Smith. "However, with roughly 90% of distributions being generated by investment earnings, sound investment programs are critical if DC plans are to be effective in meeting goals for financial security in retirement.”